Tax Guru – Ker$tetter Letter

Getting the Right Info Out of a Franchise Seller – And if you don’t have an accounting pro look over the books before buying a business, you’re nuts.  I have long advised including in any business purchase contract an escape clause that says “subject to approval by buyer’s legal and financial advisors.”  Frequently, before spending any time analyzing a company’s books, I just ask my clients if they are still interested in buying it. Rather than waste any more time crunching numbers, I just advise the clients to tell the seller that I do not approve the purchase.  The escape clause doesn’t specify any particular reasons the buyer’s advisors must have for nixing a deal, so buyer remorse is a valid enough reason for me to okay them backing out.  

Phone tax refund proving difficult to get from IRS – This is surprising to whom?  As if anything could be simple with IRS.

From a Client:

Kerry;
 
I am almost ready to send our personal tax info but I have one question. I never know how to classify what items are corporation and which are personal classifications.  I guess I don’t really understand the classification purpose. Can you help me out so I have it right when I send it to you?
 
Thank-you;

My Reply:

The reason the use of Classes is important is for you to be sure to properly identify the deductible business type expenses from the non-deductible personal ones.  Ideally, I like to run a P&L report with the columns sorted by Class and then reconcile each column to its schedule on the tax return.  In your case, there would be a Class for each of the Schedule E columns on your tax return, Corporate Royalties and Asset Leases.  Any other Schedule C, E or F business would also have its own class.  Income received from each of these operations would be coded with that Class, as would any expenses applicable to them.

It’s fine to leave the class off and let it show up in the report in the  Unclassified column.  The problem with this is that I don’t have the time to hunt through all of those entries searching for deductible things that should belong in one of the business classes.  I rely on you to do that kind of sorting & identification.   

I hope this helps you understand this issue a little better.  I have more info on  this on my website.

Let me know if you have any other questions.

Kerry

 

This would be perfect for Kay Bell’s blog on taxes from Texas.

Be Wary of Signs and Ads Offering To Pay Cash for Your Home

This reminds me of a consultation I had last week with a client who was considering selling her house. First, she was worried about her taxable gain because she couldn’t recall how much she had paid for the property seven years earlier. When I discovered that she was looking at selling for only $80,000, I explained that her cost basis was irrelevant, since she qualified for up to $250,000 of tax free gain.

Then, she explained the second area of concern. The buyer was going to pay her with a check for $40,000 and the other $40,000 in actual cash. He had stipulated that a condition of the sale was that she could not deposit the cash into her bank account. She claimed that he was a prominent local business owner, and that the source of the money was legitimate, and that was how he always did business. After more questioning, she explained that the offer was $9,000 under the most recent appraisal and she wasn’t desperate to sell.

While she wasn’t in the business of selling real estate, so that filing Form 8300 (Report of Cash Payments Over $10,000 Received In a Trade or Business) with IRS for the cash received wouldn’t technically be mandatory, the situation struck me as having potential to fall under the following from the 8300’s instructions.

Voluntary use of Form 8300. Form 8300 may be filed voluntarily for any suspicious transaction (see Definitions) for use by the IRS, even if the total amount does not exceed $10,000.

Suspicious transaction. A transaction in which it appears that a person is attempting to cause Form 8300 not to be filed, or to file a false or incomplete form. The term also includes any transaction in which there is an indication of possible illegal activity.

When I explained that the potential penalty for not filing the 8300 could be the full amount of the cash received ($40,000), my client decided it would be best to stay away from a sale under these suspicious conditions. While the $40,000 cash the buyer was offering could very well be perfectly legitimate, the fact that he wanted it kept secret sends up red flags with any normal person.

When a Partnership Is Right for You – The extremely dangerous general partnership format has been becoming less popular each year, especially as the more protective LLC format has grown in prevalence.

Q:

Subject: TAX QUESTION

Hi Kerry,

I had heard a rumor that “the only kind of stock options that can be invested in ( or played ) in a self-directed Roth IRA is…..

Covered Calls. ”     True ??  False ???  

My wife  & I both have a Roth IRA,  and we are doing some “covered calls” and also “credit spreads”, straddles, and others……

Are we in trouble already ??

A:

You need to track down the documentation for that rumor because I have never heard of any such restriction.  I checked some of my reference materials and websites (such as rothira.com and fairmark.com) and couldn’t find any mention of such a specific limitation on acceptable investments.

It has always been my understanding that Roth IRAs are allowed to invest in any of the same kinds of things as conventional IRAs, which generally fall under the “prudent man” type of umbrella.  Highly speculative and risky investments, such as lottery tickets, wouldn’t meet the prudent man test; so if any of your options trading techniques fall into that category, you might have a problem defending it.

For self directed accounts, there is generally a governing document that spells out the rules, usually in a very general sense.  If your account’s governing documents don’t specifically mention a limit on the kinds of investments that are acceptable, the general rule should apply.

Basing investment and tax strategies on word of mouth rumors that have passed though who knows how many people already is crazy.  So, anybody who is claiming to have such information that is counter to conventional wisdom should be required to back those statements up with something more substantial than “a friend of a friend told me.”

That’s the best I can come up with.  Please pass on anything more definitive that you come across.  In the meantime, I wouldn’t worry about what you are doing, especially if your Roth accounts are making profits because that on its face would prove that the investments are good.

Kerry

First Follow-Up:

Kerry,

  As always you are wonderful.  Yes I agree that whoever says such things should back them up, etc,etc. but, I wouldn’t trust anything they

would produce as backup.  I trust you, your experience and backup.  You have confirmed basically what I thought to be true.

  I figured that if it wasn’t allowed, then our brokerage wouldn’t allow us to do it. (because some brokerages won’t let their customers do these

kinds of transactions but ours is fairly liberal, therefore, it must be legal for a Roth IRA)

 

  My ultimate “backup” is you. “You’re the Guru”, you’re to “go to guy”.

 

  Thanks for letting me interrupt your day, I appreciate your time and efforts….

My Reply:

You’re absolutely right that, even though they aren’t infallible, stockbrokers that handle IRA accounts should be up on any restrictions of the kind you mentioned.

Kerry

Second Follow-Up:

Talk about timing, 

I swear, I didn’t ask these guys for anything…It just showed up in my mail…..kinda makes you go , “Hmmmmm”

  

——————————————-

Dear Mr. …,

You have requested the ability to engage in options combination trading (including American-style spreads) in your IRA account, for which Delaware Charter Guarantee & Trust Company acts as trustee.  Certain of these transactions may only be recorded in margin accounts according to requirements of applicable rules. 

Accordingly, optionsXpress has approved your IRA account as a Limited Margin Account.  As a Limited Margin Account, you will be permitted to engage in combination options trading, including American-style spreads; however, you will not be permitted to engage in other margin transactions (i.e. utilizing lending).

Please refer to sections 31-34 of your account agreement for margin terms that apply to your IRA account.  Also, please refer to the Margin Risk Disclosure Statement, which is provided to all margin accounts and available on our website.

Your IRA account continues to be subject to the terms of Delaware Charter’s Self-Directed Individual Retirement Trust Agreement. If you have any questions, please contact customer service at 1-888-280-8020 or through the Live Help banners on our website.

Sincerely,

Fred E. Cadena
Assistant Vice-President, Risk and Margin
optionsXpress, Inc.
Member NASD | SIPC 

 
Final Words:

That does seem to be very coincidental timing.

Does your agreement with them have some kind of Big Brother clause, allowing them to monitor your emails?

Kerry